The plaintiff and his wife were close family friends with the defendant
Sauers. The plaintiff testified that Sauers asked the plaintiff for a
loan of $180,000 in order to expand the defendant’s automotive glass
business. Sauers himself testified that the purpose of the loan was to
purchase an existing auto glass company and for a down payment on two
additional buildings that would be used by the auto glass business for
corporate purposes.

The record and evidentiary exhibits at trial showed that the plaintiff
had written four checks made out to “T&M Corp.” T&M
Corp was the name that defendant had chosen for the auto glass business.
Defendant did in fact deposit these checks into the T&M Corp. Corporate
account. The money in the corporate account was subsequently used to buy
the auto glass company, but the two buildings were never purchased. Sauers
testified that the remainder of the money was used to pay for corporate
expenses, and the plaintiff did not argue with this assertion or provide
any contrary evidence.

Plaintiff alleges that, pursuant to the oral agreement regarding the loan,
defendant agreed to be personally liable for the loan if T&M corp.
could not repay it. The trial court indeed ruled in favor of plaintiff,
stating that defendant was personally liable for the balance of the outstanding
loan, some $89,000.

The issue of personal liability is significant mainly because it means
the business owner, as in this case, may be responsible for payment even
if the business goes bankrupt. Although not at issue in this particular
case, business owners who accept personal liability for business debts
may lose their life savings or even their home, as they are valid targets
for creditors. The creation of state LLC statutes that allow for small
businesses to be created as limited liability corporations has, as one
of its policy goals, the elimination of personal liability for business
debts as an incentive to create small businesses.

Analysis: Oral Contracts and Evidence

In general, written contracts offer some advantages. They are a clear,
definite record of the agreement and they contain evidence (such as signatures)
that both parties intended to be bound to the deal. A rule known as the
Parol Evidence Rule (see previous blog entries) prevents outside evidence
about, e.g. oral representations made by the parties, if a written contract
is unambiguous on its face. There is a judicial preference for the memorializing
aspect of a written contract.

With oral contracts, much of the above goes out the window. The evidence
heard is necessarily Parol in nature. There is no written memorial of
the deal, instead there may or may not be written records, such as the
personal checks in this case.

Here, the court heard testimony by both sides about the terms of the oral
deal. The court focused on the parties’ intent: the loan was to
be used for corporate purposes. Whether or not the buildings were purchased
or whether the funds were used for corporate expenses was largely irrelevant
to the court. Thus, the purpose of the oral contract was not breached
– the funds were used for corporate purposes. The personal liability
issue illustrates the evidentiary quandary in which a court finds itself.
Generally, in these situations, the court weighs the testimony of each
side as equally credible, as in here. Since the plaintiff is the one who
alleged personal liability of the defendant, the plaintiff was responsible
for showing, via the evidence, that this liability was agreed upon. Since
presumably the defendant disagreed, the court viewed the conflicting testimony
as cancelling out. Without evidence to show personal liability, the plaintiff’s
theory of the case failed.

Please, for the reasons illustrated above, be careful when entering into
oral contracts for large sums of money. Retaining experienced counsel
is a very good idea - please do not hesitate to
contact our office for a consultation.